Newbie Needs Help Analyzing Possible First Deal 8Unit MFR!!!!

16 Replies

First let me start off by stating that i'm a rookie who's following the advice of many BP podcast and webinars by trying to take action!!!. So thank you @Brandon Turner @Ben Leybovich @Michael Blank and others for your great insight.

I did what I was told and established a relationship with a commercial broker who in turn sent me an off market listing that I believe is a great value add property.

This is a 8 unit MFR in an "A CLASS" neighborhood located in Bklyn NY within 2-10min walking distance to any and all amenities, (Barclay's Center, Malls, Shopping center, Banks, Restaurants, Museum, Parks etc.)

All 8 units are 4 rooms (2bedrooms) including 1 duplex apt.....  5 units are rent stabilized and 3 units are free market including Duplex, all of which are receiving way less than market rents.

Typical Market rents for 2 bedrooms in this area are 3k+/mth, also the typical vacancy rates for this area are @ 2%-3.5% (Bklyn market analysis). All leases will expire in 2016...

As far as market comps for this property goes, the only property in the area like this one is next door and is selling each unit as condos. This building sold in 2013 for 1.66mill.

AS PER PROFORMA

Asking Price = $3,400,000 GAI = $163,494 Expenses (ESTIMATED) = $44,391 NOI = $119,103 NOI / 3.4MIL = 3.5% CAP RATE (TYPICAL CAP RATES IN NYC IS 3.5 -4%)

However I'm lost on what the real financials are because of the DHCR reports a rent roll totaling $5,484/mth from the Rent Stabilized apts ONLY!! information on this report is as of November 11, 2014.

None of the rents from the free market apts were included on this DHCR report. Does this mean that the Free Market apts are vacant?

AS PER DHCR REPORT

GAI = $65,808         are these the actual numbers?

Expenses (ESTIMATED) = $44,391     why are the expenses estimated?

NOI = $21,417 is this the true NOI ?

Can anyone help me figure out a reasonable offer based on the above information? If there isn't enough info what else do I need to know?

I want to at least make an offer so that the Broker doesn't write me off as a tire kicker and stops sending me listings.

Any suggestions on what my next conversation with the broker should be?

I want to thank everyone in advance for the feed back...

Hey guys I'm trying to learn how to be a R.E rock star like most of you so PLEASE DON'T BEAT ME UP!!!! I've seen how brutal some of you are on the newbies on the forums.

Don't get me wrong I can take it with the best of them but do remember this is a learning curve for us newbies...

The DHCR is only reporting the stabilized units? What about the other units? What the DHCR should show you is the last time those units were still stabilized - the last legal rent before becoming free market. If they are not on there at all, that is a flag.

Lets hope for a second that they are in fact on the DHCR but not current rents. That's fine - they're free market. Add that to the list of things to ask your broker for. The broker should be able to give you an OM (offering memorandum) which will include at LEAST gross receipts annually. After an LOI, you should be able to get a rent roll, and during due diligence, copies of all leases. Its a give and take, every step closer to closing, you get a little more concrete information.

Everything on the DHCR other than legal rents is complete BS. Toss it, ignore it, burn it, whatever.

Also, 3.5 cap rate is still high in most of BK for actual trades - just saying. Manhattan? sure, but BK? Not yet! Published expenses are NEVER actual, so published caps will vary from reality.

I'm on a large investment brokerages marketing list for Manhattan and Brooklyn and I've been receiving offerings running in the 3.5% - 4% range for four to six story walk ups some with ground floor retail.

Because I'm not a buyer in these markets I've not actually analysed the markets and or market comps.

You should reach out to the broker for clarification on the free market rental units.

Note: I'm sure you are aware of this, but in the event your aren't the rent controlled units are nearly impossible to convert to free market. Hopefully you aren't underwriting the deal to convert those units to free market rents anytime soon.

Look at the real rent roll and expense reports. For that you may need to Sign a confidentiality agreement Then you will get your NOI them divide the yearly NOI by the local area average cap rate that your broker will be able to provide to you and that's the Max you should offer for a commercial property. Another thing is that through your diligence as in walking through the property and unit you will find repairs that needs be done then you will need to renegotiate your offer to fit the repairs and other discrepancies costs on the property.

I've ran the numbers you've posted and normally sellers tend to inflate their numbers to make the property they selling look better that's why you need see the actual numbers. The price sellers want to sell is retail but you must only buy wholesale as I call it. 3,400,000 according to the numbers by seller is a fair price but when you've showed the other numbers as in 21k NOI them the price went down to 611k purchase price as I divided the NOI by the area cap rate. Commercial properties are worth the amount of income it produces that's why you must see real numbers in order to make an informed decision.

This is from the DHCR report as of 11/11/14

Note: Apartment 2L which was Rent Stabilized is now one of the 3 Free Market units according to the pro forma. My Question is.... Are the property revenue actual rents or are they made up?

This is the information that I have to go off of so I hope this helps you all to better understand how to help me analyze this deal. Even if its not a deal I still need your help in order to understand Why its not a deal? and What would make it a good one for future reference?

Originally posted by @Jackson Maia :

I've ran the numbers you've posted and normally sellers tend to inflate their numbers to make the property they selling look better that's why you need see the actual numbers. The price sellers want to sell is retail but you must only buy wholesale as I call it. 3,400,000 according to the numbers by seller is a fair price but when you've showed the other numbers as in 21k NOI them the price went down to 611k purchase price as I divided the NOI by the area cap rate. Commercial properties are worth the amount of income it produces that's why you must see real numbers in order to make an informed decision.

 Thanks Jackson because I ran all the same numbers and came up with all the same answers you did which confused the heck outta me, which lead to me writing this post for help in the first place.

Originally posted by @Christopher Telles :

Note: I'm sure you are aware of this, but in the event your aren't the rent controlled units are nearly impossible to convert to free market. Hopefully you aren't underwriting the deal to convert those units to free market rents anytime soon.

 Thanks Chris I actually wasn't aware of that and I was actually hoping that I could convert those units into Free Market rents once the leases expired being as that is what happened to apt 2L.

Originally posted by @Travis Lloyd :

The DHCR is only reporting the stabilized units? What about the other units? What the DHCR should show you is the last time those units were still stabilized - the last legal rent before becoming free market. If they are not on there at all, that is a flag.

Lets hope for a second that they are in fact on the DHCR but not current rents. That's fine - they're free market. Add that to the list of things to ask your broker for. The broker should be able to give you an OM (offering memorandum) which will include at LEAST gross receipts annually. After an LOI, you should be able to get a rent roll, and during due diligence, copies of all leases. Its a give and take, every step closer to closing, you get a little more concrete information.

Everything on the DHCR other than legal rents is complete BS. Toss it, ignore it, burn it, whatever.

Hey Travis I posted the info that I received from the brokers offering memorandum take a look and tell me what you think 

Originally posted by @Tory Ellis :
Originally posted by @Christopher Telles:

Note: I'm sure you are aware of this, but in the event your aren't the rent controlled units are nearly impossible to convert to free market. Hopefully you aren't underwriting the deal to convert those units to free market rents anytime soon.

 Thanks Chris I actually wasn't aware of that and I was actually hoping that I could convert those units into Free Market rents once the leases expired being as that is what happened to apt 2L.

 Make sure you're crystal clear on the DHCR regulations for destabilization of a previously rent stabilized unit.  The amount you can increase rent on vacancy is a function of both current rent as well as the length of time it has been since the last new lease was issued, plus of course getting the current tenants to vacate/not-renew.  I haven't looked at the numbers on the post in detail yet, but it's a fairly risky move and you need to be sure you understand and are funded for potential costs (time and real money) of getting those units converted.

@Ben Leybovich Lol..... I was actually waiting on you to tell me to run!!. I posted all the info that I received from the broker on the thread, I would love for you to take a look and maybe tell me if I should still run or how It needs to be structured for it to work. Just wanted you to know that I love reading your post man! to me you're one of the best and funniest!!.

@Christopher Telles  thanks for the clarification. Take a look at the thread because I just posted the info I got from the Broker maybe you can help shed some light.

@Tory Ellis those legal rents on the RS units are too low for you to expect to convert them into FM anytime soon through the proper channels. If you went in right now and started making renovations to common areas AND started increasing the legal rent annually at the limit, it would be 20+ years to get those free market.

There are other ways, but not recommended for first timers nor faint of heart.

Originally posted by @Tory Ellis :

@Ben Leybovich Lol..... I was actually waiting on you to tell me to run!!. I posted all the info that I received from the broker on the thread, I would love for you to take a look and maybe tell me if I should still run or how It needs to be structured for it to work. Just wanted you to know that I love reading your post man! to me you're one of the best and funniest!!.

@Christopher Telles  thanks for the clarification. Take a look at the thread because I just posted the info I got from the Broker maybe you can help shed some light.

 I was looking at a tax credit property the other day. Lots of loss to lease to be recaptured if the property could be taken to market. In the end, too speculative for me...and dealing with freaking government. I run from that kinda stuff...:)

Originally posted by @Ben Leybovich :

 I was looking at a tax credit property the other day. Lots of loss to lease to be recaptured if the property could be taken to market. In the end, too speculative for me...and dealing with freaking government. I run from that kinda stuff...:)

 These tax credit deals are legit. I generally like what @Ben Leybovich is scared of meaning I like quite a bit:) The change over from a tax credit to free market property is much easier than people think and there is not much ambiguity. A little bit more work but you can buy at a better basis since it scares off guys like Leboyavich. 

Originally posted by @Serge S. :
Originally posted by @Ben Leybovich:

 I was looking at a tax credit property the other day. Lots of loss to lease to be recaptured if the property could be taken to market. In the end, too speculative for me...and dealing with freaking government. I run from that kinda stuff...:)

 These tax credit deals are legit. I generally like what @Ben Leybovich is scared of meaning I like quite a bit:) The change over from a tax credit to free market property is much easier than people think and there is not much ambiguity. A little bit more work but you can buy at a better basis since it scares off guys like Leboyavich. 

 Dude - behave yourself. I've got one foot on the airplane already. This is the time to get on my good side :)